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South Korea: A Nation Living Off Credit

By Yeong Seon Kim

Back in January 1997, when I received my first paycheck from the Korea Broadcasting System (KBS), my father offered me a little advice. First, he told me, cash is always best. Second, he said, never co-sign a loan for anyone, even if it is your closest friend. And finally, don't get a credit card, but if you do, get just one. This advice came from a man who had spent his entire life running a small business. To my father and others from his generation, you could trust only cash.

When I first started working as a journalist in 1997, it was not very common to make purchases using credit cards in South Korea. It was inconvenient because more often than not, small restaurants and other businesses did not accept credit cards, and those that did required that purchases exceed $10. Back then it also wasn't easy to own a credit card. Credit card companies required a documented history of consistent income, generally from big, well-established companies.

But all of that would change a couple of years later. By the spring of 2002, attractive young women in short skirts hit the streets of Seoul, trying to entice people to sign up for credit cards. The women were everywhere: in metro stations, at the entrances of every major department store, and even on college campuses. It took only a few minutes to fill out an application form -- your name, address, telephone number, and a signature would be enough. A phone call a few days later would confirm your information, and then your card would be mailed to you within a week. Suddenly, credit cards became so easy to obtain that even teenagers and unemployed people could get them.

By the end of 2002, South Koreans had 148 million credit cards -- an average of 4 credit cards per person. The third largest market for credit cards -- behind the United States and the United Kingdom -- South Korea had become a nation living off credit.

Spending Your Way Out of An Economic Slump

The changes can be traced back to 1997, when the Asian financial crisis led Kim Dae Jung, the country's new president, to devise a strategy to encourage consumer spending. The government did away with requirements that credit cards be primarily used for purchases, allowing cardholders to obtain cash advances and loans, functions previously limited to banks and other financial institutions. A few months later, the government lifted the $700 cash-advance limit, allowing people to withdraw as much cash as they wanted.

To spur credit card usage, the government issued annual tax rebates based on the amount of purchases, and required all retailers to accept credit cards. Each time a consumer used a credit card, the transaction was entered into a lottery that awarded cash prizes.

The deregulation successfully stimulated consumer spending -- in 2002, consumer expenditures hit $291 billion, an increase of 17 percent over the previous year -- and almost half of all purchases were made using credit cards. With the fastest growing economy of any Asian country, it seemed as if South Korea had miraculously recovered from one of the most severe economic crises in its history.

The Debt Trap

But then the troubles began. The interest rate for credit card overdue payments was incredibly high, and if you were unable to pay back your overdue loan within six months, the total amount to pay backdoubled.

And people were spending much more than they were saving. Total household debt, including credit card debt and lending, hit $361 billion in 2002, a 30 percent increase from the previous year. For many people under the age of 30 who had no regular source of income but enjoyed buying the hottest new product, credit cards were their ticket to a more affluent lifestyle.

Furthermore, the ease of owning a credit card led to another time bomb: People opened new accounts to pay off debt on their other credit cards. Small-business owners, unable to obtain bank loans, opened as many credit card accounts as they could in order to obtain cash advances.

As more and more people failed to make payments, credit card companies began to limit the number of new accounts and prohibit cash advances, causing countless numbers of Koreans to default on their credit card debt.

As the credit crisis worsened, crime rates, especially robberies and assaults, began to increase throughout the country. In March 2002, police arrested four college students for attempting to rob a bank using automatic rifles. According to the police, the students said they needed money to pay off $11,300 in debts they had accumulated buying a car, brand-name clothes and luxury goods for their girlfriends. Stories of suicides by those who faced extraordinary financial difficulties also began to appear in the media. By the end of 2003, about 4 million South Koreans -- nearly 10 percent of the entire population -- had defaulted on credit card debt.

The Creditor Becomes the Debtor

Even the credit card companies began to face financial difficulties and found themselves on the verge of bankruptcy. In 2003, LG Card, South Korea's biggest credit card issuer at the time, ran out of cash and was forced to temporarily halt ATM cash-advance services. If LG Card declared bankruptcy, financial analysts feared it would cause a domino effect throughout the entire economy. Realizing that LG Card was simply "too big to fail," the government had little choice but to save the failing firm. It pressured the nation's biggest companies and banks to pour billions into LG Card and other credit card companies to prevent the economy from experiencing a worse economic disaster than the one in 1997.

But the bailout did little to help people pay off the tsunami of unpaid debt they had piled up over the years. As a remedy, the government set up a new agency called the Credit Recovery Supporting Service to help people reschedule their debt and to hold money management classes for the public. Between November 2002 and November 2003, more than 1 million people participated in counseling classes, and 300,000 had their debt adjusted.

Credit card companies also made efforts to reform their operations through stricter criteria for loans, capital reductions, restructuring and job cuts. Within three years, credit card companies were back on their feet -- going from record financial losses to modest profits -- while the use of credit cards declined.

It is said that those who forget the lessons of the past are doomed to repeat them. In 2009, Koreans now own more than 100 million credit cards -- nearly the same number as in 2002, the year before the crisis occurred. The credit card companies insist that they've improved the way they do business, but back in 2003, they essentially said the same thing.

Following South Korea's credit card crisis, a big controversy ensued about who was to blame. Consumers and credit card companies blamed the government for reckless deregulation. Government officials blamed consumers. In the end, perhaps all of us -- the credit card companies, the government and the consumers -- shared the blame. Maybe that's also true for the current credit card problems facing the United States.

Yeong Seon Kim is a TV producer from Korea. She worked for 12 years at KBS, the biggest public network in Korea. She was a field reporter and producer for more than four years for the premiere investigative television series, In-Depth 60 Minutes. She hosted the show for six months before she came to Berkeley. She also hosted an interview show from 2007 to 2008.

posted november 24, 2009

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